Jan 5, 2009

India - Cut in fuel prices looks likely

Sanjay Dutta

NEW DELHI: Here's a bit of sunshine amid the forecast of economic recession continuing in 2009. You can expect fuel prices to become cheaper by Rs 10 a litre or so of petrol and remain that way through the year if the peak winter trend in the international oil market is anything to go by.

Polltime political compulsions of brushing up a people-friendly image will make sure the government utilises the window of opportunity provided by oil's continued low run.

Broadly, present petrol and diesel prices are in tune with $55-60 a barrel crude level. By all indications, crude is unlikely to sustain that level this year. The forecasts range between $30 a barrel by Goldman Sachs to $43 by JP Morgan, at least in the first three months. The outlook is unlikely to change drastically in the remaining months as demand forecasts, such as the one by Deutsche Bank, too project more than a 1% decline.

The short $2 surge in the last few days, on the back of the flare-up in West Asia and Russia stoking gas shortage fears after it shut supplies to Ukraine, is temporary.

That leaves the government plenty of room to lower pump prices of at least motor fuels. Kerosene and cooking gas, however, are another story. Despite the low international crude and petro products prices, the lopsided subsidy mechanism still leaves state-run oilmarketers with a loss on these two products. The oilmarketers are earning a profit of roughly Rs 15 a litre on petrol and Rs 3 on diesel but lose Rs 17 on a litre of kerosene and Rs 148 per cooking gas refill.

No wonder, the government is reworking its arithmetic and working out another round of price cut for motor fuels -- and possibly cooking gas -- without hurting the oilmarketers too much. Last week, oil minister Murli Deora told TOI the cut could be expected later this month. Though the jury is still out, that cut could be of the order of Rs 5 a litre of petrol, Rs 1-2 of diesel and maybe Rs 20 per cylinder of cooking gas.

There may be further reductions down the road as it now looks certain that oil's heady days are over -- at least in the near future. Oil has stumped Opec's sharpest-ever production cut and failed to get excited by geopolitical events. If taken as a full-year average, crude prices have dropped 54% in 2008 from $96 a barrel to a tad above $44 on December 31. In between, of course, it created history by spiking to a little over $147 on July 11.

If anything, crude will stabilise at a level that will make a reduction in pump prices comfortable for all stakeholders. Many industry watchers say a floor will take time in coming until the market sees demand getting destroyed in a sustained fashion. At that point, prices could first level off in the upper $20-30 a barrel range before beginning to push back toward $50 in the third quarter or so